With a 4.8% dividend yield and a rapidly growing business, AltaGas (TSX:ALA) is a stock that’s worth your attention. You see, AltaGas’s business has been booming, as the company perfects its marriage of safety and growth. And AltaGas’s stock price is not far behind.
AltaGas stock is up 4.4% so far in April. Is it a buy after recently reported earnings?
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A new company
For those of you who don’t know, AltaGas is an energy infrastructure giant with more than $20 billion in assets and a strong position in two distinct areas. The first is the utilities business, which is comprised of regulated natural gas utilities. The second is AltaGas’s midstream segment. This business includes natural gas gathering and processing assets as well as natural gas export terminals. These terminals support AltaGas’s global export platform.
The last five years have been good to AltaGas. Revenue has grown 230% over these years to $14 billion in 2022. Also, net earnings have gone from net losses to a solid $399 million in 2022. This is the result of AltaGas’s transformative 2017 acquisition of WGL Holdings Inc., a diversified U.S. energy infrastructure company. While this debt-financed acquisition caused a significant debt burden for AltaGas, it also transformed it in the most positive way.
The combined company has been able to leverage each other’s strengths in the utilities, midstream, and clean power industries. All these years later, we are seeing this strategic and transformative acquisition bear fruit.
AltaGas reports strong Q1 earnings and outlook
AltaGas’s latest quarter, the first quarter (Q1) of 2023, was more of what we have come to expect from the company: stability, predictability, and financial strength. Revenue in the quarter came in at $4 billion. While this represented an increase of a mere 4%, the company was able to show growth, despite headwinds. And it was able to maintain its 2023 guidance.
In a nutshell, Q1 2023 normalized earnings per share (EPS) came in at $0.98, earnings before interest, taxes, and depreciation (EBITDA) came in at $582 million, and free funds flow came in at $1.63 per share. While the utilities segment was negatively impacted by warmer-than-expected weather, its EBITDA of $401 million was stable and predictable. On the midstream side, EBITDA grew just over 5% to $183 million, as volume growth and higher pricing provided a positive lift.
The outlook for AltaGas continues to be positive. A strong and steady utilities business will continue to complement the faster-growing midstream business. For 2023, the midpoint of management’s EPS guidance is $1.95, which is 4.3% higher than 2022. Also, management has committed to a compound annual growth rate of 5-7% through to 2026.
AltaGas stock fights its way back
As AltaGas continues to prove itself, its financials are continuously improving. Yet, AltaGas’s stock price remains lower than it was five years ago, in 2018. This has me thinking — if AltaGas’s revenue and earnings are so much higher today, why is its stock price still lower?
Well, a few things come to mind. Firstly, we cannot underestimate the power of investor perception. As I previously mentioned, AltaGas took on a lot of debt to fund its 2017 acquisition. This debt really became unmanageable for AltaGas in 2018, which prompted the company to sharply decrease its dividend (by more than 55%). This takes a toll on investor confidence. It simply and understandably takes time to get over it.
The good news is that today, AltaGas’s annual dividend is far higher than it was in 2018. In fact, at $1.12 per share, it sits 53% higher. But that’s not all that has changed. AltaGas’s debt load was a big part of what got it into trouble in the first place — and it’s going lower. In the first quarter, AltaGas paid down $1.1 billion in debt on its way to reducing its debt burden.
